No way does Gretchen Morgenson get to take a victory lap because of the SIGTARP report, which she tries to do today. As the late great Tanta pointed outtime and again, Morgenson is "a tendentious writer with only a marginal grasp of her subject matter and what appears to be an insatiable desire to make uncontroversial facts sound sinister." How she still has a job is an enduring mystery.
This is what Morgenson wrote last September, at the height of the crisis:

A collapse of [AIG] threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

This was unequivocally false, as the SIGTARP report makes clear. The SIGTARP report strains to make a credible argument that Goldman had any exposure to AIG, let alone $20 billion of exposure. In fact, the SIGTARP report doesn't even succeed in proving that Goldman had any exposure to AIG — it basically just says, based on no evidence or argument of any kind, "Well, it's technically possible that things could've gotten even worse than Goldman's already-conservative assumptions." But $20 billion of exposure? Not. Even. Close.
So no, Gretchen, you do not get to take a victory lap. Your September 27, 2008 article was materially false, and breathtakingly irresponsible.

30
comments:

Anonymous
said...

It's inexplicable that they hang on so tightly to an obviously untenable interpretation of the facts.

Between firing her or firing Barofsky, I'd fire the more dangerous of the two: Barofsky.

I'm not saying that Morgenson is correct. But I think that you are misstating the case as well.

Goldman Sachs had $20 billion (or more) of gross credit exposure to AIG. It's just that it also held collateral posted by AIG and by counterparties to CDS contracts on AIG to offset most or all of that exposure, with the result that it's net exposure was far, far lower than its gross exposure (and what Morgenson wrote was indeed incorrect).

From the point of view of the stability of the financial system, the fact that Goldman was one of the banks that gave AIG the rope to hang itself with and thus that it had a huge quantity of gross exposure to AIG is important.

The unnatural whale who hunts humans in the imagination of an insane human being.

In reality, AIG, through its incompetence, manufactured the rope that was going to hang the global financial system. Goldman had nothing to do with AIG's incompetence. AIG took care of that all by themselves.

I don't understand your point of view. In the absence of counterparties who were willing to increase their gross exposure to AIGFP (possibly because they believed they could control their net exposure), AIGFP could not have sold all the credit protection they sold.

I can agree that AIGFP was a party to the manufacture of the rope, but the simple fact is it took two counterparties to write those credit default contracts.

I'm not a journalism expert but isn't there some professional obligation for someone like GM to recognize the existence of an opposing analysis? Certainly in debate or law, one would be expected to. Or is she just "opinion" so she can ignore reasoning she doesn't like? I am glad I had the benefit of your work before I read her piece. I agree with your evaluation.

"A collapse of [AIG] threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said."

Then you say this was unequivocally false.

IS IT THE CASE THAT SEVERAL PEOPLE DID NOT TELL HER THAT? YOU AND SIGTARP PROVE THAT THE $20 BILLION HOLE DID NOT EXIST. YOU DO NOT REFUTE THAT SHE HAD SOURCES THAT DID SAY THAT TO HER. HER DECLARATIONS ARE THAT PEOPLE TOLD HER THAT. READ WHAT YOU WROTE.

Gretchen may have, in the heat of the moment, been mislead about the ultimate facts. People told her there was a 20 billion exposure. Notional $20 gross is about right.

That more details came out and net exposure was much less is not breathtakingly irresponsible.

It feels to me like you are in a political fight and smearing someone who is critical of your team. Yet you write like you are very smart, and often times appear to be. The hysterics here do not help your case or reputation.

After all, our financial sector is not highly transparent despite all the romantic pronunciations about transparency and markets. the real world pays opacity and opacity gets the system in trouble.

GM says one thing very powerful in her concluding sentence.

"Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports(SIGTARP) — and until it does, our country’s economic and financial system will continue to be at risk."

The legislative proposals coming out of DC on TBTF and Derivatives Reform are very immature.

RAJ, I suspect the writer of this blog couldn't give a toss whether you think his reputation is good or bad.

Morgensen has a long standing track record of getting basic facts wrong. Now you may think that she simply doesn't matter but in at least one case, an article she wrote caused major issues in the financial system - I am thinking of the muck-raking she did on Bear Stearns the weekend it was being rescued.

I may also be old school in believing that Morgensen's role is theoretically meant to be more than repeating gossip that happens to fit with her prejudices. Isn't that why the NYT is theoretically a "newspaper of record"?

Reading SIGTARP again; what a woeful pile of crap. They should employ dung beetles to put it out of its misery.

He complains that the Fed initially decided not to reveal the names of the counter parties because of concerns about market stability in the fall of 2008.

Then insipidly mocks the Fed because the revelation of the counter party names in April, 2009 did not appear to destabilize the markets, etc. The concerns of the Fed in the fall of 2008 appear, in Barofsky's little mind, to have been proven false.

Lol. By April, 2009 the financial markets were substantially stabilized. He is literally saying in its impact that he expects bad news in November, 2008 to be comparable to bad news in April, 2009. Did another Lehman fall in March, 2009. Did the Federal reserve loan another AIG 85 billion in March, 2009. Do ya think just maybe April, 2009 is a tad different than November, 2008?

It's a horrible report. If this is what we can expect from a policy audit of the Federal Reserve, the damage could be shattering - 100s billions of wasted dollars to higher interest rates, etc.

EoC - in Blankfein's responses to the NYT, he seems to be saying that 10.4 billion in assets left the Goldman balance sheet - 4.8 billion in collateral for the secrities lending position went back to AIG, and 5.6 billion in CDO to the Federal Reserve (ML III) - immediately after they got the check for 12.9 billion.

Would that not mean the "backdoor bailout", which constantly specified to be 13 billion (obviously 12.9 billion rounded up), was actually a paltry 2.5 billion?

EoC - in Blankfein's responses to the NYT, he seems to be saying that 10.4 billion in assets left the Goldman balance sheet - 4.8 billion in collateral for the secrities lending position went back to AIG, and 5.6 billion in CDO to the Federal Reserve (ML III) - immediately after they got the check for 12.9 billion.

I don't think ML III was created until November, so that $5.6bn didn't immediately leave the balance sheet. Personally, I don't think there was any "backdoor bailout" of Goldman, since it was fully hedged against both the CDS positions and the securities lending positions.

By the end of the bailout GS had received at least $14 billion in collateral and/or settlement funds for CDS alone ($5.9 was posted before AIG's failure: http://www.bloomberg.com/apps/news?pid=20601087&sid=atPG852RVX3Y). So there's no way GS gross exposure(before the netting of collateral) to AIG on CDS alone could be calculated at less than $14 billion.

Furthermore, I'm not sure why you rule out the possibility that CDS that insure ABS CDOs cannot fall to zero in value, which is the only justification I can think of for not counting CDS notional value in gross exposure. (Remember we're not talking about CDS on MBS or CDS on single name firms.)

GS also had exposure to AIG via securities lending (otherwise they would not have received $4.8 billion in bailout funds for securities lending).

The published information on the AIG bailout demonstrates unequivocally that GS had at least $19 billion of gross exposure to AIG. Once the notional value of CDS on ABS CDOs is taken into account and the possibility that GS had unpublished exposure to AIG are taken into account, the gross exposure could be much higher.

No, I'm sorry, but you're confused. I'm going to try to convince you though, since you're clearly a thoughtful commentator.

Goldman received a total of $12.9bn from AIG after it was bailed out. But that $12.9bn included the $4.8bn from securities lending (NOT in addition to). And against that $4.8bn, Goldman held an equivalent amount in Agencies (which if anything would've been a safe-haven in the event of an AIG default, since the government was officially backing Fannie and Freddie at that point).

Like I've said before, Goldman's gross exposure to AIG was equal to the cost of replacing the CDS trades in the market, not the notional amount. Goldman had roughly $20bn in notional CDO CDS outstanding with AIG, which the SIGTARP report confirms (see pg. 16). So the debate about Goldman's gross credit exposure to AIG comes down to how much it would've cost Goldman to replace that $20bn of CDS trades in the market.

Goldman says it would've cost them $10bn to replace the CDS trades in the market, which essentially prices the CDS trades at ~50 cents on the dollar. Since these were CDS on 2005-vintage subprime-backed CDOs that were originally rated AAA, we can look at the ABX.HE.AAA.2006-01 contract to see where the market was pricing these kinds of CDS at the time of AIG's collapse.

Pre-Lehman, the ABX.HE.AAA.2006-01 was trading at roughly ~85-90 cents (ridiculous, I know, but that's a whole other story). After Lehman and AIG's collapses, the ABX.HE.AAA.2006-01 collapsed to ~65, but never once dropped below even 60 during the crisis. So Goldman's estimate that it would cost them $10bn to replace the $20bn in CDS trades was actually quite conservative, and had clearly already priced in an AIG default.

As to why I discount the possibility of the CDO CDS prices falling to zero, I'd say that if during the greatest financial panic of our lifetimes, comparable CDS prices didn't even fall below 60, I feel pretty safe saying that the Goldman's CDS trades wouldn't have fallen to zero. Someone's always willing to write CDS protection, it's just a matter of price. Buffett would've been writing CDS protection on those trades if they'd fallen below 40 I bet -- with a great big smile on his face, of course.

So there you go: Goldman's gross credit exposure, even using conservative estimates, was only $10bn -- against which Goldman held $7.5bn in collateral and had $2.5bn in CDS on AIG, making its net credit exposure to AIG zero. What's more, Gretchen Morgenson wasn't even talking about Goldman's gross exposure -- she said an AIG collapse "threatened to leave a hole of as much as $20 billion in Goldman’s side." That's net exposure, and it was just plain false.

csissoko - I am just a cowpoke. I almost always use medical analogies to explain systemic risk to people as cattle often die of systemic failure. Also, I believe taxpayers are the logical people to be asked to fund financial bailouts when there is a systemic crisis.

So I was stunned to find a MIT professor on your blog who sort of agrees with me - Caballero. Thanks.

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I'm a finance lawyer in New York. I used to focus on derivatives and structured finance (you know, back when there was a structured finance market). I spent the majority of my career at one of the major investment banks. My background is in economics and, unfortunately, politics.

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